Lyons v. Georgia Pacific Corp. Sal. Emp. Ret.

• Decision Date: 11 August 2000
• Docket Number: No. 99-10640,99-10640
• Citation: 221 F.3d 1235
• Parties: (11th Cir. 2000) Jerry L. LYONS, individually and on behalf of all other persons similarly situated, Plaintiff-Appellant, v. GEORGIA PACIFIC CORPORATION SALARIED EMPLOYEES RETIREMENT PLAN, Georgia Pacific Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1235

221 F.3d 1235 (11th Cir. 2000)

Jerry L. LYONS, individually and on behalf of all other persons similarly situated, Plaintiff-Appellant, v. GEORGIA PACIFIC CORPORATION SALARIED EMPLOYEES RETIREMENT PLAN, Georgia Pacific Corporation, Defendants-Appellees.

No. 99-10640.

United States Court of Appeals, Eleventh Circuit.

Aug. 11, 2000.

[Copyrighted Material Omitted] Appeal from the United States District Court for the Northern District of Georgia.(No. 97-00980-1-CV-JOF), J. Owen Forrester, Judge.

Before CARNES, BARKETT and WILSON, Circuit Judges.

CARNES, Circuit Judge:

This is an Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001, et. seq., case in which we are called upon to decide issues about how to calculate a consensual, lump sum payout in a front-loaded, defined benefit, cash balance pension plan with fixed interest credits. The principal issue is whether such a payout must be calculated using the present value methodology set out in Treasury Regulations 1.411(a)-11 and 1.417(e)-1,¹ the former of which the district court held to be invalid. See Lyons v. Georgia-Pacific Corp. Salaried Employees Retirement Plan, 66 F.Supp.2d 1328, 1336 (N.D.Ga.1999). For reasons we will explain, we are convinced that those Treasury regulations are valid and control the calculation of consensual lump sum payouts, at least insofar as they apply to distributions that occurred prior to the effective date of the amendments that the Retirement Protection Act of 1994 made to ERISA § 203(e), 29 U.S.C. § 1053(e).

I. BACKGROUND

A. The Plan

There are two basic types of pension plans, defined contribution plans and defined benefit plans. A defined contribution plan provides for each participant a separate account to which contributions are made, with the retirement benefit depending on the amounts that have been contributed to the account and the investment gains and losses on the amounts in the account. See ERISA § 3(34), 29 U.S.C. § 1002(34); see also Barbara J. Coleman, Primer on Employee Retirement Income Security Act 32-33 (4th ed.1993). No specific, defined retirement amount is promised under a defined contribution plan. See id. The plan involved in this case is not of that type.

Instead, this case involves a defined benefit plan, which is one where the retirement benefit is expressed as a certain annual amount to be paid by the employer over the employee's lifetime, beginning at the employee's retirement. See ERISA § 3(35), 29 U.S.C. § 1002(35). Such a plan promises a specific defined benefit the calculation of which is not dependent upon investment gains or losses. See Coleman, supra, at 32-33. There are subtypes of defined benefit plans. The one involved in this case is a cash balance defined benefit plan.

At all times relevant to this case, the Georgia-Pacific Corporation Salaried Employees Retirement Plan ("the Plan") has been a cash balance plan, which is a defined benefit plan that determines benefits for each employee by reference to the amount of the employee's hypothetical account balance. An employee's hypothetical account balance is credited by the employer with hypothetical allocations and hypothetical interest earnings determined under a formula set forth in the Plan. The hypothetical allocations and hypothetical earnings are designed to resemble actual contributions and earnings under a defined contribution plan. See I.R.S. Notice 96-8, 1996-1 C.B. 359, 1996 WL 17901. One benefit of cash balance plans is that they "allow younger workers to take a larger benefit with them when changing jobs." Give Employees Meaningful Information When Pensions are Changed to Cash Balance Plans, Says Actuary, PR Newswire, May 7, 1999.²

Section 3.1 of the Plan requires that a hypothetical bookkeeping account-the Personal Account-be established and maintained for each participant. Each month the participant's Personal Account is credited with (1) service credits, a specified percentage of the participant's compensation for that month; and (2) interest credits, which are derived by multiplying the hypothetical balance in the Personal Account by the Periodic Adjustment Percentage. That adjustment percentage is computed under the Plan by determining the Pension Benefit Guaranty Corporation ("PBGC")³ twelve-month "immediate" annuity interest rate for the preceding year, then adding .75% to that rate, and, lastly, dividing this composite annual rate by 12. Under ERISA the Plan could have used an adjustment percentage equal to the prescribed maximum PBGC rate, but instead it used a higher rate. If the Plan had not used a higher adjustment rate, the dispute in this case would never have arisen, but more about that later.

Although service credits cease when the participant leaves employment, interest credits continue until the participant's Benefit Commencement Date. That is why the Plan is said to be a "front-loaded" interest credit plan, defined as one in which "future interest credits to an employee's hypothetical account balance are not conditioned upon future service." I.R.S. Notice 96-8 at 4. In the case of an annuity form of benefit under this Plan, the Benefit Commencement Date is the date that the annuity is payable. Thus, if the participant is entitled to an annuity that is payable at age 65, under the front-loaded aspect of the Plan, interest credits continue to accrue until age 65, even if the participant separates from employment with Georgia-Pacific before age 65.

Under the Plan a participant may elect, under certain specified conditions, to receive his accrued pension benefits in an optional lump sum form, payable immediately, rather than as an annuity commencing at age 65. If the participant elects this option, the amount payable under the Plan is a single sum equal to the amount in the participant's Personal Account (the hypothetical bookkeeping account).⁴ It is this feature of the plan-the provision that the lump sum payout is the amount in the Personal Account at the time-that is at issue in this case.

B. Facts

From 1965 until 1990, Jerry L. Lyons was employed as a paper inspector and paper tester for Great Northern Corporation. In 1990, Georgia-Pacific Corporation acquired Great Northern. As a result of the acquisition, Lyons became an employee of Georgia-Pacific, Great Northern's pension plan was merged with the Georgia- Pacific Salaried Employees Retirement Plan (which we are calling "the Plan"), and Lyons became a participant of it.

On January 5, 1991, Lyons left employment at Georgia-Pacific. In accordance with Article 4 of the Plan, Lyons was entitled to a vested benefit, because he had worked for Georgia-Pacific and Great Northern for at least five years. Pursuant to section 1.1 of the Plan, Lyons' accrued pension benefit was an annuity commencing at age 65. In November 1992, Lyons elected to receive his accrued pension benefit in the optional lump sum form, payable immediately, as he was permitted to do under section 6.4(a) of the Plan. Consistent with the Plan's payout provision for lump sums, Georgia-Pacific distributed to Lyons in January of 1993 a lump sum equal to the amount credited to his Personal Account-$36,109.15. See Lyons, 66 F.Supp.2d at 1329, 1332.

Two months after receiving his lump sum, Lyons consulted with the National Center for Retirement Benefits ("NCRB")⁵ and was told by it that Georgia- Pacific had distributed to him substantially less than the amount he was entitled to receive under ERISA § 203(e), see 29 U.S.C. § 1053(e), at least as that statutory provision had been interpreted in Treasury Regulation 1.411(a)-11 and Treasury Regulation 1.417(e)-1.

We will discuss those Treasury regulations more later, but at this juncture it is enough to say that Georgia-Pacific did not follow them. If it had, instead of merely paying Lyons a lump sum equal to the amount credited to his Personal Account, which was $36,109.15, Georgia-Pacific would have taken the value of the annuity Lyons would have received at age 65 and discounted it to present value by using the PBGC rate.⁶ That approach, following the Treasury regulations, would have yielded Lyons a lump sum payout of $49,341.83. See Lyons, 66 F.Supp.2d at 1332. The validity of the Treasury regulations is thus a question worth $13,232.68 to Lyons.⁷

C. Procedural History

In a letter dated March 18, 1996, the NCRB, acting on behalf of Lyons, advised Georgia-Pacific that Treasury Regulation 1.417(e)-1 requires a minimum lump sum payable from a defined benefit plan to be no less than the present value of the participant's normal retirement benefit; and that the present value of Lyons' normal retirement benefit exceeded the amount in his Personal Account, which was the amount he was paid. The NCRB's letter requested that Georgia-Pacific recalculate Lyons' benefit in accordance with Treasury Regulation 1.417(e), and pay Lyons the shortfall.

Georgia-Pacific responded to the NCRB on April 17, 1996, taking the position that: the Plan is a "special" form of defined benefit plan known as a "cash balance plan;" IRS Notice 96-8 notes that cash balance plans define benefits for each employee by reference to a hypothetical account balance; most cash balance plans permit the distribution of an employee's accrued benefit in the form of a single sum equal to the employee's hypothetical account balance; Lyons' "lump sum distribution was not calculated with reference to the present value of a normal retirement benefit;" and instead, the amount distributed to Lyons was the amount credited to his Personal Account.

On April 14, 1997, Lyons, on behalf of himself and other similarly situated persons, filed a class action complaint against Georgia-Pacific and the Plan (collectively "Georgia-Pacific") alleging that the method used to pay lump sum cash distributions under the Plan violated ERISA § 203(e)(2), 29 U.S.C. § 1053(e)(2).⁸ After Georgia-Pacific answered the complaint, the district court in September of 1997 certified a...